Explain the double-declining-balance method


The Diamond Glitter Company is in the process of preparing its financial statements for 2012. Assume that no entries for depreciation have been recorded in 2012. The following information related to depreciation of fixed assets is provided to you.

1.The company purchased equipment on January 2, 2009, for $165,000. At that time, the equipment had an estimated useful life of 7 years with a $25,000 salvage value. The equipment is depreciated on a straight-line basis. On January 2, 2012, as a result of additional information, the company determined that the equipment has a remaining useful life of 3 years with a $15,000 salvage value.

2.During 2012, the company changed from the double-declining-balance method for its building to the straight-line method. The building originally cost $625,000. It had a useful life of 10 years and a salvage value of $50,000. The following computations present depreciation on both bases for 2010 and 2011.

3.The company purchased a machine on July 1, 2010, at a cost of $450,000. The machine has a salvage value of $25,000 and a useful life of 10 years. The company's bookkeeper recorded straight-line depreciation in 2010 and 2011 but failed to consider the salvage value. Ignore Tax effect.

4.The company has failed to accrue sales commissions payable at the end of each of the last 2 years, as follows.

5.In reviewing the December 31, 2011, inventory, the company discovered errors in its inventory-taking procedures that have caused inventories for the last 3 years to be incorrect, as follows. The company has already made an entry that established the incorrect December 31, 2012, inventory amount.

6.At December 31, 2012, the company decided to change to the straight -line method depreciation method on its retail display equipment from double-declining-balance. The equipment had an original cost of $250000 when purchased on January 1, 2011. It has a salvage value of 0 and a 8-year useful life. Depreciation expense recorded prior to 2012 under the double-declining-balance method was $62500. The company has already recorded 2012 depreciation expense of $46875 using the double-declining-balance method.

7.Before the current year, the company accounted for its income from long-term construction contracts on the completed-contract basis. Early this year, the company changed to the percentage-of-completion basis for accounting purposes but continues to use the completed-contract method for tax purposes. Income for the current year has been recorded using the new method. Prior year tax effects must be considered. The following information is available.

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Finance Basics: Explain the double-declining-balance method
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